ConstructConnect’s Chief Economist Alex Carrick recently sat down with Carolina Borges Cavalcante of Oldcastle Building Solutions to discuss the economy and the outlook for the construction industry. In Part 2 of the interview, Alex and Carolina discuss U.S. construction.

Highlights from Part 2:

• Residential starts are around 1.1 million units per year annualized, about 500,000 short of where they should be, so there’s room for growth.
• The desire of empty nester seniors and millennials to live downtown is driving multi-residential high-rise construction.
• Millennials may not make the move to the suburbs at the same rate as past generations.
• Strong outlook for the construction of office buildings, as well as distribution centers and call centers.
• Hotel construction will remain cyclical, especially when it comes to renovations and additions.
• Demographics aren’t strong enough to support a lot of growth for education construction, especially at the primary and secondary levels.
• Higher education is seeing a boost from endowment funds, alumni donations, and tie-ins between companies and research institutions.
• With an aging baby boomer population, demand for hospital construction is strong. Uncertainty over the repeal and replacement of the Affordable Care Act could stymie that.
• There needs to be an emphasis on infrastructure spending, both for hard and soft infrastructure, to create productivity improvements to drive economic growth.
• Cities like Boston, San Jose, and San Francisco are seeing the best growth due to their strong high-tech and/or knowledge-based components.
• Other cities doing well, in terms of growth, include Salt Lake City, Denver, Minneapolis-St. Paul, and Nashville.

Full Transcript of Part 2:

Carolina: Alex, first of all, thank you so much for coming here and spending the time with us. It’s really an honor to interview you with our partnership with ConstructConnect. We’ve been working together for several years and it’s good to have you here to answer some of my questions.

For those of you that don’t know Alex, he is the Chief Economist covering North America for ConstructConnect, as well as CanaData, and he has been providing our industry with economic and forecast data for over 30 years. During our conversation today, we’ll talk about the US economy, what we can expect for construction, and also touch upon what is happening in Canada.

Let’s talk now a little bit about the construction industry specifically. And there are several policies from this administration that should help construction. Let’s start off with residential construction. What do you see happening there in the next two years 2017, 2018? What’s the outlook?

Alex: All of it’s tied together and it’s all really, really interesting. Residential housing starts, you see, are at about 1.1 million units per year annualized and they should be up around 1.6 million units. There’s still lots of room to grow and again, residential construction can really help drive the whole economy.

What happened after the great recession was that multiple units came back quickly. Part of that was because of the subprime mortgage crisis. People lost their homes, there were foreclosures so they had to move into rental accommodation. A lot of that was high-rise work.

Plus, the demographics have been working very much towards multi-unit starts. Because seniors have been, empty nester seniors have been, giving up their homes in the suburbs and they’ve discovered the joys of living downtown. They’re close to all the amenities: healthcare, entertainment, and shopping. They can meet their friends, they can take cabs wherever they want to go.

And the millennials have discovered that it’s nice living downtown because they can establish their green credentials. They can ride to work on rapid transit or they can ride bicycles to work or walk. And then again, they’re close to everything. So demographics factors came together there. As for the future…

Carolina: Yeah, some people believe that the millennials, as they start getting married, having children, they’ll want to go back to the suburbs. Do you believe that or what do you think about that?

Alex: That’s what a lot of analysts are projecting. That that’s going to take place. The millennials are just now starting to form their families and as they have their children, that they’ll want to revisit the lifestyles that their parents have. Which means the single home in the suburbs with a lot and the garden and that sort of thing. If that happens, then that influences a lot of other construction, infrastructure work like schools having to be built in the suburbs.

But I don’t think that’s going to happen the same as in the past. I think there’s going to be some of that but I think it’s going to be a mix. There’s a lot to like about living downtown now.

Living downtown is not the way it used to be. There’s a lot less pollution, there’s less crime, there’s hardly a city that you can name that hasn’t done something to build something like taking an old railroad tracks and converting it into a park.

The way some of these cities have been spruced up, it’s terrific. I think that a lot of people are going to continue to stay with the high rise living. I don’t think there’s going to be quite the shift that maybe some other people are thinking.

Carolina: So, if we now transition to commercial construction, what do you think are the highlights there?

Alex: Well, commercial you’re talking about things like office buildings and certainly the vacancy rates in office buildings have come down. They’re about as low as they’ve been in eight or nine years and that’s because of the growth in the economy.

A lot of office building construction has already been an issue, certainly New York. Manhattan had a very strong string of office buildings start in the last several years. That’s happening across the country as well. And then there’s things like the distribution centers and the call centers and the telemarketing centers and that’s all basically office building construction. So, here’s relatively good outlook for that category.

Carolina: Hotels had a really big pick up in 2016. Do you see them maintaining that or is that going to slow down a little bit?

Alex: Well, hotels…that’s another category that’s…like I find all of them interesting. You’re absolutely right, hotels is very cyclical. The thing with hotels is if you’ve got one person in the industry or one company in the industry that suddenly starts to spruce up by building new banquet facilities or ballroom facilities or their restaurants, they have to take action very quickly. That’s why you get them all taking action at once and then you do have a cyclical peak then it goes down.

Carolina: One of the other segments we haven’t touched upon yet is institutional. What are the areas there of growth for institutional education, hospital. What’s driving those?

Alex: In terms of school construction, what you look at is the demographics. That’s one of the things that you look at. Demographers, it’s relatively easy. You take the number of people. If you know how many people there are in each age category in the overall population, you can just project that forward.

You can get a measure of how many people are between the ages of 8 and 18 and just project that forward and that will tell you about the basic underlying demand for education at the lower grades. The demographics are not particularly strong. That’s not really an area that you would expect would be really big for construction unless millennials move back to the suburbs, as we talked about before.

Frankly for the United States, the demographics for people between 8 and 26 or 27, that’s not really very strong right now either. And then there’s other factors working against higher education. It’s things like the high cost of tuition and the fact that you can get your degree over the internet. And the fact that the unemployment rate is so low is a big factor because school age people want jobs rather than the feeling that they need to stay in school and get more.

However, having said that, there are some things that are really helping at the level of higher education. It’s things like endowment funds. The universities are making a lot of money off of the stock market.
Also, there’s alumni who have become incredibly rich through high-tech firms that they’ve started, start-up firms. They want to give the money back as thanks to their alma maters. Often you’ll see where there’s some new faculty that’s being built that has the name of somebody who’s suddenly got billions of dollars. It’s that kind of thing.

And then also, there’s the tie-in between companies and academic research institutions. Actually, when you look at where the growth in the economy is occurring, it’s where there are those hubs of academia coming together with enterprises. That’s really where the growth is. So there are some really positive things happening in education.

Carolina: What about hospitals?

Alex: Hospitals. There we get into the politics of it. The Patient Protection and Affordable Care Act, PPACA. When that was introduced in 2010, hospital construction just dried up. And it was because there were all these legal challenges to whether or not it would pass a test.

About a year and a half ago, the Supreme Court concluded that tax money could go towards Medicaid and it could go towards financing these firms that were involved in hospital construction. At that time, about a year and a half ago, suddenly, if you look at the employment numbers in hospitals, that number started to skyrocket and hospital construction, ConstructConnect’s hospital starts numbers, started to pick up.

So it looked like things were starting to happen and plus there’s the demographics again. There’s the aging baby boomer population so the demand is going to be there. But now with what’s happening on the political front and all the uncertainty again, you have to be wary about what’s going to happen in that sector at least over the next couple of years.

Carolina: Let’s talk a little bit about infrastructure construction and transportation and highways and what are the opportunities there in the nonbuilding space?

Alex: The way I see the world is I try to encapsulate these things. There’s a lot of different ways that you can view what’s going on. But the way I’ve kind of condensed in my own way of thinking is the logistics rule. In the world we live in today, the fast-paced world we live in, logistics is king, logistics rule. What I mean by that is that almost everything in the economy is about moving goods, services, and people faster, cheaper, safer, and greener. The whole push for infrastructure is almost synonymous with productivity improvements.

And what that means is, there’s the debate about the money that might be coming, or at least the emphasis that’s being put on infrastructure, by the new administration. I’m seeing on some of the news broadcasts on TV that why should we do this when all it does is create a certain number of construction jobs that are over in a couple years. That’s not the way to think of it at all.

Infrastructure is about productivity improvements. It is about competing with the rest of the world because the rest of the world, that’s what they’re doing. They’re moving goods, services, and people faster, cheaper, greener, and safer. If you understand that that’s what it’s about, the country that understands that best is the country that’s going to come out on top in the competition for having the fastest growth.

There’s two kinds of infrastructure, too. This is another area that I really like to talk about and hope that other people agree with me about as much as anything or understand the importance of this.

There’s hard infrastructure and there’s soft infrastructure. The hard infrastructure is the obvious things like roads and highways and sewers and water mains but then there’s the soft infrastructure and that’s schools and hospitals. Why I call that soft is because people don’t think of that as being infrastructure.

As an economist, I come across as sounding cold-blooded like I’ve got no heart because the way that I look at that soft infrastructure isn’t in terms of being altruistic about how we want to take care of our citizens and we want them to be smart and everybody gets the proper education.

But if you really think about it as soft infrastructure, a big part of wanting schools and hospitals, again, is productivity because it’s your workforce. This is why I seem cold-blooded. But really, you want healthy workers and you want smart workers. So, infrastructure isn’t just hard infrastructure, it’s that soft infrastructure as well.

Carolina: I don’t think that’s coldhearted. It’s showing that we care about the quality of work we’re putting forth and education and health are essential for that. In terms of we’ve talked about the different segments and how they’re each growing, let’s talk a little bit about geographies and regions and cities. Where do you see growth within the U.S. in the different geographies?
Alex: Again, all of these things tie together. It’s almost like a big story or a novel that you could write except it’s nonfiction. It’s not a novel, it’s nonfiction. But there is a story. All of these things tie together because the centers that are doing best are the ones that have a high-tech or a knowledge-based component that’s particularly strong. And the three cities that I think really have been shining in the U.S. are Boston and San Jose and San Francisco.

It’s because of the combination of low unemployment rate. or the other thing that I look at, in terms of those statistics that I look at, house prices. House prices on the West Coast are very high because that’s almost a proxy for prosperity. Economists love to use the word proxy because it sounds official. All that means is it’s an indication of prosperity.

The reason is because, well, obviously, San Francisco and San Jose, it’s the high-tech sector and Boston has all those really top schools that are tying in with the corporate world. Now on the West Coast, venture capital firms are starting to look outside San Francisco and they’re moving into Oakland and they’re moving into Portland. Those cities are benefiting as well. It’s also cities like Raleigh that has the academics and Washington that has the big government connection that’s tied into the high-tech sector and the web. There’s other pockets of the country.

Carolina: You didn’t mention Texas which in terms of population there’s a big movement of population towards Texas.

Alex: Yes, and I know that you live in Houston.

Carolina: Yes.

Alex: Which is the only city in Texas that has been struggling in terms of its labor numbers. But otherwise, until the last couple of years with the drop in energy prices, every city in Texas has been outperforming every other city in the country in terms of employment growth and low unemployment rate. Dallas and Austin and San Antonio are still right at the top if you look at labor market indicators and population growth. So yes, Texas on its own has been doing great.

Then there’s cities like Salt Lake City and Denver and Minneapolis-St. Paul that are just quietly going about their business and they’re doing pretty well. The other city that I’m getting a kick out of, when I look at all these numbers, is Nashville. Not only because of the TV show, Nashville, but the country music tie-in. But Nashville has things going on there that a lot of people aren’t aware of. A lot of private hospital firms have head offices in Nashville. So, the numbers out of Nashville have been quite strong. It’s those kinds of tie-ins. It all interconnects.

Carolina: Great. Thank you very much. Alex, it’s an honor talking to you and I really, really appreciate your time. I hope all of you have enjoyed it as well.